Open Banking in the UK launches, as PSD2 regulations enter into force, on 13 January; however, six of nine UK banks not ready
UK consumer watchdog reports 92 per cent of consumers unaware of ‘open banking’
Treasury-commissioned independent Review report due out soon; what could the Australian open-banking framework look like?
Sources: Open Banking Implementation Entity; European Commission
Point of View
On 13 January 2018, the revised Payment Services Directive (PSD2) entered into application, with the objectives of giving consumers more and better choice in the EU retail payment market and introducing higher security standards for online payments. Coincidently, the same date was chosen by the Competition and Markets Authority (CMA) to launch the UK Open Banking regime.
The UK’s nine largest banks, the CMA9, were required to release datasets pertaining to customer transaction accounts and business current accounts, by 13 January. However, six banks have not been able to do so. The CMA has provided extensions of up to six weeks to each of these entities.
Whilst PSD2 is intended to ‘open up the EU payment market’, the European Commission has not prescribed how that should occur, and therefore many EU markets have not yet progressed their open banking solutions. This detail will come from the Regulatory Technical Standards on Strong Customer Authentication and Secure Communication. The Standards are currently being reviewed by the EU legislative arm but are expected to come into force in late 2019.
The open banking approach in the UK comes from its interpretation of PSD2 (all EU Member Countries must transpose PSD2 into national legislation), but it dictates how the banks should open up their data to third parties. Accordingly, the Open Banking Implementation Entity (OBIE) has created a set of open read/write API standards.
The CMA mandated an open banking initiative in February 2017, in its Retail Banking Market Investigation Order. The Investigation Order instructed the CMA9 to set up and fund the OBIE, with representation from a wide range of stakeholders, including banks, fintechs, consumer bodies and government.
The regulatory impetus and motivation behind the introduction of open banking has largely been to improve banking services for customers. Regulators have sought to achieve this by supporting entry of emerging players into the market (e.g. fintechs and neobanks), to increase competition and encourage innovation in the sector.
Open banking also brings a number of opportunities for traditional banks. In a report, Deloitte sets out ways incumbents might harness the developing regulatory environment to their advantage.
But what does open banking potentially look like? Deloitte sees a banking marketplace, where products are decoupled from their means of distribution to customers. It suggests that incumbents could choose to only create banking products, and leave distribution to other parties, or vice versa. Incumbents could continue with the existing ‘full service provider’ model without third-party integration, but both products and distribution would need to be enhanced to survive. Lastly, incumbents could relinquish ownership of both products and distribution, and instead operate as a utility providing other participants with infrastructure and back-end services.
In Australia, a report commissioned by Treasury on the Review into Open Banking, is due out imminently. The report will outline a potential approach for implementing open banking for Australia. A future framework could, potentially, range from a prescriptive one determined by regulators, through to a principles-based framework developed jointly by industry and stakeholders. What we do know is that the government’s decision to implement open banking is part of a broader Consumer Data Right aimed at facilitating an economy-wide, consumer-directed data industry. Therefore, any design of the open banking regime will need to keep interoperability between other sectors such as telecoms and energy in mind, as it progresses.
What lessons can Australia learn from the UK experience? Given that one-third of UK banks were ready on 13 January, does this suggest that the timeframe mandated by the CMA was too tight? And could Australian financial institutions face a similar challenge with overly optimistic timelines?
What about consumer awareness? According to a survey conducted in September 2017 by the UK consumer watchdog, Which?, the vast majority of respondents were totally unaware of ‘open banking’. Furthermore, around half of respondents indicated they would be unlikely to share their financial data with a third party. Consumer perception of fraud is often cited as a reason.
These findings indicate the importance of a clear public education and marketing strategy as part of the open banking rollout in Australia. Consumers will need to know that ‘open banking’ exists, what it is, and have an understanding of what sharing their data means, particularly regarding security, privacy and consent.